SOUTHERN CALIFORNIA GAS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

You should read the following discussion in conjunction with the Condensed
Consolidated Financial Statements and the Notes thereto in this report, and the
Consolidated Financial Statements and the Notes thereto, "Part I - Item 1A. Risk
Factors" and "Part II - Item 7. MD&A" in the Annual Report.
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OVERVIEW

Sempra Energy is a California-based holding company with energy infrastructure
investments in North America. On July 2, 2021, Sempra Energy began doing
business as Sempra. Our businesses invest in, develop and operate energy
infrastructure, and provide electric and gas services to customers through
regulated public utilities. As we discuss in Note 12 of the Notes to Condensed
Consolidated Financial Statements in this report and in "Part I - Item 1.
Business" in the Annual Report, our business activities are organized under five
separately managed reportable segments.
Our former South American businesses and certain activities associated with
those businesses are presented as discontinued operations. Nominal activities
that are not classified as discontinued operations have been subsumed into
Parent and other. We completed the sales of these businesses in the second
quarter of 2020. Our discussions below exclude discontinued operations, unless
otherwise noted.
This report includes information for the following separate registrants:
?Sempra;
?SDG&E; and
?SoCalGas.
References in this report to "we," "our," "us," "our company" and "Sempra" are
to Sempra and its consolidated entities, collectively, unless otherwise stated
or indicated by the context. We refer to SDG&E and SoCalGas collectively as the
California Utilities, which do not include the utilities in our Sempra Texas
Utilities or Sempra Mexico segments or the utilities in our former South
American businesses included in discontinued operations. All references in this
report to our reportable segments are not intended to refer to any legal entity
with the same or similar name.
Throughout this report, we refer to the following as Condensed Consolidated
Financial Statements and Notes to Condensed Consolidated Financial Statements
when discussed together or collectively:
•the Condensed Consolidated Financial Statements and related Notes of Sempra;
•the Condensed Financial Statements and related Notes of SDG&E; and
•the Condensed Financial Statements and related Notes of SoCalGas.


RESULTS OF OPERATIONS
We discuss the following in Results of Operations:
?Overall results of operations of Sempra;
?Segment results;
?Significant changes in revenues, costs and earnings; and
?Impact of foreign currency and inflation rates on our results of operations.

OVERALL RESULTS OF OPERATIONS OF SEMPRA
In the three months ended June 30, 2021, we reported earnings of $424 million
and diluted EPS of $1.37 compared to earnings of $2,239 million and diluted EPS
of $7.61 for the same period in 2020. In the six months ended June 30, 2021, we
reported earnings of $1,298 million and diluted EPS of $4.24 compared to
earnings of $2,999 million and diluted EPS of $9.91 for the same period in 2020.
The change in diluted EPS in the three months ended June 30, 2021 compared to
the same period in 2020 included a decrease of $0.07 due to an increase in
weighted-average common shares outstanding. The change in diluted EPS in the six
months ended June 30, 2021 compared to the same period in 2020 included an
increase of $0.02 due to a decrease in weighted-average common shares
outstanding. Our earnings and diluted EPS were impacted by variances discussed
in "Segment Results" below.

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SEGMENT RESULTS
This section presents earnings (losses) by Sempra segment, as well as Parent and
other and discontinued operations, and a related discussion of the changes in
segment earnings (losses). Throughout the MD&A, our reference to earnings
represents earnings attributable to common shares. Variance amounts presented
are the after-tax earnings impact (based on applicable statutory tax rates),
unless otherwise noted, and before NCI, where applicable.
SEMPRA EARNINGS (LOSSES) BY SEGMENT
(Dollars in millions)
                                                  Three months ended June 30,                Six months ended June 30,
                                                    2021                 2020                 2021                 2020
SDG&E                                          $        186          $     193          $         398          $     455
SoCalGas                                                 94                146                    501                449
Sempra Texas Utilities                                  138                144                    273                249
Sempra Mexico                                             4                 61                     61                252
Sempra LNG                                               47                 61                    193                136
Parent and other(1)                                     (45)              (141)                  (128)              (389)
Discontinued operations                                   -              1,775                      -              1,847

Earnings attributable to common shares $ 424 $ 2,239 $ 1,298 $ 2,999

(1) Includes intercompany eliminations recorded in consolidation and certain corporate costs.

SDG&E

The decrease in earnings of $7 million (4%) in the three months ended June 30,
2021 compared to the same period in 2020 was primarily due to:
?$62 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account; offset by
?$20 million higher income tax benefits primarily from forecasted flow-through
items;
?$15 million charge in 2020 for amounts expected to be refunded to customers
related to the Energy Efficiency Program inquiry;
?$7 million higher electric transmission margin; and
?$6 million higher CPUC base operating margin, net of operating expenses.
The decrease in earnings of $57 million (13%) in the six months ended June 30,
2021 compared to the same period in 2020 was primarily due to:
?$62 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account;
?$19 million lower electric transmission margin, including the following impacts
in 2020 from the March 2020 FERC-approved TO5 settlement proceeding:
•$18 million to conclude a rate base matter, and
•$9 million favorable impact from the retroactive application of the final TO5
settlement for 2019; and
?$15 million lower CPUC base operating margin, net of operating expenses,
primarily due to favorable resolution of regulatory matters in 2020; offset by
?$15 million charge in 2020 for amounts expected to be refunded to customers
related to the Energy Efficiency Program inquiry;
?$13 million higher income tax benefits primarily from forecasted flow-through
items; and
?$5 million higher AFUDC equity.
SoCalGas
The decrease in earnings of $52 million (36%) in the three months ended June 30,
2021 compared to the same period in 2020 was primarily due to:
?$64 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account; and
?$9 million lower CPUC base operating margin, net of operating expenses; offset
by
?$14 million higher income tax benefits from forecasted flow-through items.
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The increase in earnings of $52 million (12%) in the six months ended June 30,
2021 compared to the same period in 2020 was primarily due to:
?$72 million charge in 2020 from impacts associated with the Aliso Canyon
natural gas storage facility litigation;
?$26 million higher CPUC base operating margin, net of operating expenses; and
?$13 million higher income tax benefits from forecasted flow-through items;
offset by
?$64 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account.
Sempra Texas Utilities
The decrease in earnings of $6 million (4%) in the three months ended June 30,
2021 compared to the same period in 2020 was primarily due to lower equity
earnings from Oncor Holdings driven by:
?increased operating costs and expenses attributable to invested capital; offset
by
?increased revenues from rate updates to reflect increases in invested capital
and customer growth (net of lower consumption primarily due to weather).
The increase in earnings of $24 million (10%) in the six months ended June 30,
2021 compared to the same period in 2020 was primarily due to higher equity
earnings from Oncor Holdings driven by:
?increased revenues from rate updates to reflect increases in invested capital
and customer growth; offset by
?increased operating costs and expenses attributable to invested capital.
Sempra Mexico
Because Ecogas, our natural gas distribution utility in Mexico, uses the local
currency as its functional currency, its revenues and expenses are translated
into U.S. dollars at average exchange rates for the period for consolidation in
Sempra's results of operations. Prior year amounts used in the variances
discussed below are as adjusted for the difference in foreign currency
translation rates between years. We discuss these and other foreign currency
effects below in "Impact of Foreign Currency and Inflation Rates on Results of
Operations."
The decrease in earnings of $57 million in the three months ended June 30, 2021
compared to the same period in 2020 was primarily due to:
?$63 million unfavorable impact from foreign currency and inflation effects net
of foreign currency derivative effects comprised of an $83 million unfavorable
impact in 2021 compared to a $20 million unfavorable impact in 2020; and
?$6 million income tax expense in 2021 from the remeasurement of certain
deferred income taxes; offset by
?$10 million earnings attributable to NCI at IEnova in 2021 compared to $27
million earnings in 2020, including the effects of the increase in our ownership
of IEnova.
The decrease in earnings of $191 million in the six months ended June 30, 2021
compared to the same period in 2020 was primarily due to:
?$289 million unfavorable impact from foreign currency and inflation effects net
of foreign currency derivative effects comprised of a $71 million unfavorable
impact in 2021 compared to a $218 million favorable impact in 2020; and
?$32 million income tax expense in 2021 primarily from outside basis differences
in JV investments and the remeasurement of certain deferred income taxes; offset
by
?$44 million earnings attributable to NCI at IEnova in 2021 compared to $171
million earnings in 2020, including the effects of the increase in our ownership
of IEnova.
Sempra LNG
The decrease in earnings of $14 million (23%) in the three months ended June 30,
2021 compared to the same period in 2020 was primarily due to:
?$63 million lower earnings from marketing operations due to losses in 2021
compared to gains in 2020, primarily driven by changes in natural gas prices;
offset by
?$38 million higher equity earnings from Cameron LNG JV primarily due to the
three-train liquefaction project achieving full commercial operations in August
2020; and
?$22 million income tax benefit in 2021 from the remeasurement of certain
deferred income taxes.
The increase in earnings of $57 million (42%) in the six months ended June 30,
2021 compared to the same period in 2020 was primarily due to:
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?$100 million higher equity earnings from Cameron LNG JV primarily due to the
three-train liquefaction project achieving full commercial operations in August
2020; and
?$22 million income tax benefit in 2021 from the remeasurement of certain
deferred income taxes; offset by
?$57 million lower earnings from marketing operations, primarily driven by
changes in natural gas prices.
Parent and Other
The decrease in losses of $96 million in the three months ended June 30, 2021
compared to the same period in 2020 was primarily due to:
?$50 million equity earnings in 2021 related to our investment in RBS Sempra
Commodities to settle pending VAT matters and related legal costs, which we
discuss in Note 11 of the Notes to Condensed Consolidated Financial Statements;
?$17 million lower preferred dividends as a result of $26 million lower
dividends due to the mandatory conversion of all series A preferred stock in
January 2021, offset by $9 million higher dividends due to the issuance of
series C preferred stock in June 2020;
?$14 million lower net interest expense; and
?$11 million loss from foreign currency derivatives in 2020 used to hedge
exposure to fluctuations in the Peruvian sol and Chilean peso related to the
sales of our South American businesses.
The decrease in losses of $261 million in the six months ended June 30, 2021
compared to the same period in 2020 was primarily due to:
?$50 million equity earnings in 2021 compared to $100 million equity losses in
2020 related to our investment in RBS Sempra Commodities to settle pending VAT
matters and related legal costs, which we discuss in Note 11 of the Notes to
Condensed Consolidated Financial Statements;
?$33 million lower net interest expense;
?$32 million lower preferred dividends as a result of $52 million lower
dividends due to the mandatory conversion of all series A preferred stock in
January 2021, offset by $20 million higher dividends due to the issuance of
series C preferred stock in June 2020;
?$17 million net investment gains in 2021 compared to $2 million net investment
losses in 2020 on dedicated assets in support of our employee nonqualified
benefit plan and deferred compensation obligations; and
?$18 million lower operating costs retained at Parent and other.
Discontinued Operations
Discontinued operations that were previously in our Sempra South American
Utilities segment include our former 100% interest in Chilquinta Energía in
Chile, our former 83.6% interest in Luz del Sur in Peru and our former interests
in two energy-services companies, Tecnored and Tecsur, which provide electric
construction and infrastructure services to Chilquinta Energía and Luz del Sur,
respectively, as well as third parties. Discontinued operations also include
activities, mainly income taxes related to the South American businesses, that
were previously included in the holding company of the South American businesses
at Parent and other.
As we discuss in Note 5 of the Notes to Consolidated Financial Statements in the
Annual Report, we completed the sales of our South American businesses in the
second quarter of 2020. On April 24, 2020, we sold our equity interests in our
Peruvian businesses, including our 83.6% interest in Luz del Sur and its
interest in Tecsur, for cash proceeds of $3,549 million, net of transaction
costs and as adjusted for post-closing adjustments, and on June 24, 2020, we
sold our equity interests in our Chilean businesses, including our 100% interest
in Chilquinta Energía and Tecnored and our 50% interest in Eletrans, for cash
proceeds of $2,232 million, net of transaction costs and subject to post-closing
adjustments.
Earnings from our discontinued operations of $1,775 million in the three months
ended June 30, 2020 included:
?$1,499 million gain on the sale of our Peruvian businesses;
?$255 million gain on the sale of our Chilean businesses, subject to
post-closing adjustments; and
?$28 million operational earnings prior to the sale of our Peruvian and Chilean
businesses.
Earnings from our discontinued operations of $1,847 million in the six months
ended June 30, 2020 included:
?$1,499 million gain on the sale of our Peruvian businesses;
?$255 million gain on the sale of our Chilean businesses, subject to
post-closing adjustments;
?$98 million operational earnings prior to the sale of our Peruvian and Chilean
businesses; and
?$7 million income tax benefit related to changes in outside basis differences
from earnings and foreign currency effects.
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SIGNIFICANT CHANGES IN REVENUES, COSTS AND EARNINGS
This section contains a discussion of the differences between periods in the
specific line items of the Condensed Consolidated Statements of Operations for
Sempra, SDG&E and SoCalGas.
Utilities Revenues and Cost of Sales
Our utilities revenues include natural gas revenues at our California Utilities
and Sempra Mexico's Ecogas and electric revenues at SDG&E. Intercompany revenues
included in the separate revenues of each utility are eliminated in Sempra's
Condensed Consolidated Statements of Operations.
SoCalGas and SDG&E currently operate under a regulatory framework that permits:
?The cost of natural gas purchased for core customers (primarily residential and
small commercial and industrial customers) to be passed through to customers in
rates substantially as incurred. SoCalGas' Gas Cost Incentive Mechanism provides
SoCalGas the opportunity to share in the savings and/or costs from buying
natural gas for its core customers at prices below or above monthly market-based
benchmarks. This mechanism permits full recovery of costs incurred when average
purchase costs are within a price range around the benchmark price. Any higher
costs incurred or savings realized outside this range are shared between the
core customers and SoCalGas. We provide further discussion in Note 3 of the
Notes to Consolidated Financial Statements in the Annual Report.
?SDG&E to recover the actual cost incurred to generate or procure electricity
based on annual estimates of the cost of electricity supplied to customers. The
differences in cost between estimates and actual are recovered or refunded in
subsequent periods through rates.
?The California Utilities to recover certain program expenditures and other
costs authorized by the CPUC, or "refundable programs."
Because changes in SoCalGas' and SDG&E's cost of natural gas and/or electricity
are recovered in rates, changes in these costs are offset in the changes in
revenues and therefore do not impact earnings. In addition to the changes in
cost or market prices, natural gas or electric revenues recorded during a period
are impacted by customer billing cycles causing a difference between customer
billings and recorded or authorized costs. These differences are required to be
balanced over time, resulting in over- and undercollected regulatory balancing
accounts. We discuss balancing accounts and their effects further in Note 4 of
the Notes to Condensed Consolidated Financial Statements in this report and in
Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.
The California Utilities' revenues are decoupled from, or not tied to, actual
sales volumes. SoCalGas recognizes annual authorized revenue for core natural
gas customers using seasonal factors established in the Triennial Cost
Allocation Proceeding, resulting in a significant portion of SoCalGas' earnings
being recognized in the first and fourth quarters of each year. SDG&E's
authorized revenue recognition is also impacted by seasonal factors, resulting
in higher earnings in the third quarter when electric loads are typically higher
than in the other three quarters of the year. We discuss this decoupling
mechanism and its effects further in Note 3 of the Notes to Consolidated
Financial Statements in the Annual Report.
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The table below summarizes utilities revenues and cost of sales. UTILITIES REVENUES AND COST OF SALES (Dollars in millions)

                                                   Three months ended June 30,                 Six months ended June 30,
                                                     2021                  2020                 2021                 2020
Natural gas revenues:
SoCalGas                                       $        1,124          $   1,010          $       2,632          $   2,405
SDG&E                                                     160                145                    428                364
Sempra Mexico                                              17                 10                     44                 30
Eliminations and adjustments                              (23)               (22)                   (49)               (39)
Total                                                   1,278              1,143                  3,055              2,760
Electric revenues:
SDG&E                                                   1,158              1,090                  2,227              2,140
Eliminations and adjustments                               (2)                 -                     (3)                (2)
Total                                                   1,156              1,090                  2,224              2,138
Total utilities revenues                       $        2,434          $   2,233          $       5,279          $   4,898
Cost of natural gas(1):
SoCalGas                                       $          223          $     106          $         496          $     384
SDG&E                                                      40                 31                    122                 91
Sempra Mexico                                               6                  3                     12                  6
Eliminations and adjustments                               (8)                (9)                   (20)               (13)
Total                                          $          261          $     131          $         610          $     468
Cost of electric fuel and purchased
power(1):
SDG&E                                          $          304          $     260          $         545          $     491
Eliminations and adjustments                              (20)                 -                    (29)                (2)
Total                                          $          284          $     260          $         516          $     489

(1) Excludes depreciation and amortization, which are presented separately on the Sempra, SDG&E and SoCalGas Condensed Consolidated Statements of Operations.

Natural Gas Revenues and Cost of Natural Gas
The table below summarizes the average cost of natural gas sold by the
California Utilities and included in cost of natural gas. The average cost of
natural gas sold at each utility is impacted by market prices, as well as
transportation, tariff and other charges.
CALIFORNIA UTILITIES AVERAGE COST OF NATURAL GAS
(Dollars per thousand cubic feet)
                                             Three months ended June 30,                   Six months ended June 30,
                                               2021                  2020                  2021                  2020
SoCalGas                                $          3.73          $     1.81          $         3.01          $     2.29
SDG&E                                              4.42                3.10                    4.44                3.51


In the three months ended June 30, 2021, our natural gas revenues increased by
$135 million (12%) to $1.3 billion compared to the same period in 2020 primarily
due to:
?$114 million increase at SoCalGas, which included:
•$117 million increase in cost of natural gas sold, which we discuss below,
•$44 million higher recovery of costs associated with refundable programs, which
revenues are offset in O&M,
•$20 million higher revenues from incremental and balanced capital projects, and
•$9 million higher CPUC-authorized revenues, offset by
•$84 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account; and
?$15 million increase at SDG&E, which included:
•$9 million increase in cost of natural gas sold, which we discuss below,
•$4 million higher revenues primarily associated with the Pipeline Safety
Enhancement Plan (PSEP), and
•$4 million higher CPUC-authorized revenues, offset by
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•$6 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account.
In the three months ended June 30, 2021, our cost of natural gas increased by
$130 million to $261 million compared to the same period in 2020 primarily due
to:
?$117 million increase at SoCalGas primarily due to higher average natural gas
prices; and
?$9 million increase at SDG&E, including $12 million due to higher average
natural gas prices, offset by $3 million due to lower volumes primarily driven
by weather.
In the six months ended June 30, 2021, our natural gas revenues increased by
$295 million (11%) to $3.1 billion compared to the same period in 2020 primarily
due to:
?$227 million increase at SoCalGas, which included:
•$112 million increase in cost of natural gas sold, which we discuss below,
•$85 million higher recovery of costs associated with refundable programs, which
revenues are offset in O&M,
•$68 million higher CPUC-authorized revenues, and
•$38 million higher revenues from incremental and balanced capital projects,
offset by
•$84 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account; and
?$64 million increase at SDG&E, which included:
•$31 million increase in cost of natural gas sold, which we discuss below,
•$16 million higher recovery of costs associated with refundable programs, which
revenues are offset in O&M,
•$14 million higher CPUC-authorized revenues, and
•$8 million higher revenues primarily associated with PSEP, offset by
•$6 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account.
In the six months ended June 30, 2021, our cost of natural gas increased by $142
million (30%) to $610 million compared to the same period in 2020 primarily due
to:
?$112 million increase at SoCalGas primarily due to higher average natural gas
prices; and
?$31 million increase at SDG&E, including $25 million due to higher average
natural gas prices and $6 million due to higher volumes primarily driven by
weather.
Electric Revenues and Cost of Electric Fuel and Purchased Power
In the three months ended June 30, 2021, our electric revenues, substantially
all of which are at SDG&E, increased by $66 million (6%) to $1.2 billion
compared to the same period in 2020 primarily due to:
?$44 million higher cost of electric fuel and purchased power, which we discuss
below;
?$36 million higher recovery of costs associated with refundable programs, which
revenues are offset in O&M;
?$17 million higher revenue from transmission operations;
?$15 million charge in 2020 for amounts expected to be refunded to customers
related to the Energy Efficiency Program inquiry;
?$11 million higher revenues associated with SDG&E's wildfire mitigation plan;
and
?$10 million higher CPUC-authorized revenues; offset by
?$77 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account.
Our utility cost of electric fuel and purchased power, substantially all of
which is at SDG&E, increased by $24 million (9%) to $284 million in the three
months ended June 30, 2021 compared to the same period in 2020 primarily due to
an increase in market costs, offset by a decrease in demand from the adoption of
rooftop solar.
In the six months ended June 30, 2021, our electric revenues, substantially all
of which are at SDG&E, increased by $86 million (4%) to $2.2 billion compared to
the same period in 2020 primarily due to:
?$90 million higher recovery of costs associated with refundable programs, which
revenues are offset in O&M;
?$54 million higher cost of electric fuel and purchased power, which we discuss
below;
?$20 million higher CPUC-authorized revenues;
?$18 million higher revenues associated with SDG&E's wildfire mitigation plan;
and
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?$15 million charge in 2020 for amounts expected to be refunded to customers
related to the Energy Efficiency Program inquiry; offset by
?$77 million decrease due to the release of a regulatory liability in 2020
related to 2016-2018 forecasting differences that are not subject to tracking in
the income tax expense memorandum account;
?$22 million lower revenues due to favorable resolution of regulatory matters in
2020; and
?$18 million lower revenues from transmission operations, including the
following impacts in 2020 related to the March 2020 FERC-approved TO5 settlement
proceeding:
•$26 million to settle a rate base matter, and
•$12 million favorable impact from the retroactive application of the final TO5
settlement for 2019.
Our utility cost of electric fuel and purchased power, substantially all of
which is at SDG&E, increased by $27 million (6%) to $516 million in the six
months ended June 30, 2021 compared to the same period in 2020 primarily due to
an increase in market costs, offset by a decrease in demand from the adoption of
rooftop solar.
Energy-Related Businesses: Revenues and Cost of Sales
The table below shows revenues and cost of sales for our energy-related
businesses.
ENERGY-RELATED BUSINESSES: REVENUES AND COST OF SALES
(Dollars in millions)
                                             Three months ended June 30,                 Six months ended June 30,
                                              2021                  2020                  2021                 2020
REVENUES
Sempra Mexico                           $          387          $      265          $         727          $      554
Sempra LNG                                          52                  69                    248                 192
Parent and other(1)                               (132)                (41)                  (254)                (89)
Total revenues                          $          307          $      293          $         721          $      657
COST OF SALES(2)
Sempra Mexico                           $          122          $       44          $         241          $      113
Sempra LNG                                         111                  44                    212                  83
Parent and other(1)                               (114)                (37)                  (225)                (86)
Total cost of sales                     $          119          $       51          $         228          $      110

(1) Includes eliminations of intercompany activity. (2) Excludes depreciation and amortization, which are presented separately on Sempra's Condensed Consolidated Statements of Operations.

In the three months ended June 30, 2021, revenues from our energy-related
businesses increased by $14 million (5%) to $307 million compared to the same
period in 2020 primarily due to:
?$122 million increase at Sempra Mexico primarily due to:
•$64 million from the marketing business primarily due to higher natural gas
prices and volumes,
•$22 million higher revenues from TdM primarily due to higher volumes, and
•$18 million from the renewables business primarily due to the acquisition of
ESJ in March 2021 and renewable assets placed in service in December 2020 and
March 2021; offset by
?$17 million decrease at Sempra LNG primarily due to:
•$66 million decrease from natural gas marketing operations primarily due to
losses in 2021 compared to gains in 2020, mainly driven by changes in natural
gas prices, offset by
•$49 million increase in revenues from LNG marketing operations primarily from
higher natural gas sales to Sempra Mexico mainly as a result of higher natural
gas prices and volumes, and from higher diversion revenues due to higher natural
gas prices; and
?$91 million decrease primarily from higher intercompany eliminations associated
with sales between Sempra LNG and Sempra Mexico.
In the three months ended June 30, 2021, the cost of sales for our
energy-related businesses increased by $68 million to $119 million compared to
the same period in 2020 primarily due to:
?$78 million increase at Sempra Mexico primarily due to higher natural gas
prices and volumes at the marketing business and primarily higher volumes at
TdM; and
?$67 million increase at Sempra LNG mainly from natural gas marketing activities
due to higher natural gas purchases; offset by
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?$77 million decrease primarily from higher intercompany eliminations associated
with sales between Sempra LNG and Sempra Mexico.
In the six months ended June 30, 2021, revenues from our energy-related
businesses increased by $64 million (10%) to $721 million compared to the same
period in 2020 primarily due to:
?$173 million increase at Sempra Mexico primarily due to:
•$123 million from the marketing business primarily due to higher natural gas
prices and volumes,
•$23 million from the renewables business primarily due to the acquisition of
ESJ in March 2021 and renewable assets placed in service in December 2020 and
March 2021, and
•$9 million higher revenues from TdM mainly due to higher power prices and
volumes, offset by unrealized losses on commodity derivatives in 2021 compared
to unrealized gains in 2020; and
?$56 million increase at Sempra LNG primarily due to:
•$110 million increase in revenues from LNG marketing operations primarily from
higher natural gas sales to Sempra Mexico mainly as a result of higher natural
gas prices and volumes, and from higher diversion revenues due to higher natural
gas prices, offset by
•$53 million decrease from natural gas marketing operations primarily due to
changes in natural gas prices; offset by
?$165 million decrease primarily from higher intercompany eliminations
associated with sales between Sempra LNG and Sempra Mexico.
In the six months ended June 30, 2021, the cost of sales for our energy-related
businesses increased by $118 million to $228 million compared to the same period
in 2020 primarily due to:
?$129 million increase at Sempra LNG mainly from natural gas marketing
activities primarily due to higher natural gas purchases; and
?$128 million increase at Sempra Mexico primarily due to higher natural gas
prices and volumes at the marketing business and at TdM; offset by
?$139 million decrease primarily from higher intercompany eliminations
associated with sales between Sempra LNG and Sempra Mexico.
Operation and Maintenance
In the three months ended June 30, 2021, O&M increased by $126 million (14%) to
$1.0 billion compared to the same period in 2020 primarily due to:
?$63 million increase at SoCalGas primarily due to:
•$44 million higher expenses associated with refundable programs, which costs
incurred are recovered in revenue, and
•$19 million higher non-refundable operating costs;
?$47 million increase at SDG&E primarily due to:
•$36 million higher expenses associated with refundable programs, which costs
incurred are recovered in revenue, and
•$11 million higher non-refundable operating costs; and
?$26 million increase at Sempra Mexico primarily due to expenses associated with
the growth in the business; offset by
?$29 million decrease at Parent and other primarily from lower deferred
compensation expense and retained operating costs.
In the six months ended June 30, 2021, O&M increased by $276 million (16%) to
$2.0 billion compared to the same period in 2020 primarily due to:
?$127 million increase at SDG&E primarily due to:
•$106 million higher expenses associated with refundable programs, which costs
incurred are recovered in revenue, and
•$21 million higher non-refundable operating costs;
?$123 million increase at SoCalGas primarily due to:
•$85 million higher expenses associated with refundable programs, which costs
incurred are recovered in revenue, and
•$38 million higher non-refundable operating costs; and
?$28 million increase at Sempra Mexico primarily due to expenses associated with
the growth in the business; offset by
?$14 million decrease at Parent and other primarily from lower retained
operating costs offset by higher deferred compensation expense.
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Aliso Canyon Litigation and Regulatory Matters
In March 2020, SoCalGas recorded a charge of $100 million in Aliso Canyon
Litigation and Regulatory Matters related to settlement discussions in
connection with civil litigation associated with the Leak, which we describe in
Note 11 of the Notes to Condensed Consolidated Financial Statements.
Other Income (Expense), Net
As part of our central risk management function, we may enter into foreign
currency derivatives to hedge Sempra Mexico parent's exposure to movements in
the Mexican peso from its controlling interest in IEnova. The gains/losses
associated with these derivatives are included in Other Income (Expense), Net,
as described below, and partially mitigate the transactional effects of foreign
currency and inflation included in Income Tax Expense for Sempra Mexico's
consolidated entities and in Equity Earnings for Sempra Mexico's equity method
investments. We also utilized foreign currency derivatives in 2020 to hedge
exposure to fluctuations in the Peruvian sol and Chilean peso related to the
sales of our operations in Peru and Chile, respectively. We discuss policies
governing our risk management in "Part II - Item 7A. Quantitative and
Qualitative Disclosures About Market Risk" in the Annual Report.
In the three months ended June 30, 2021, other income, net, increased by $10
million (16%) to $72 million compared to the same period in 2020. The change was
primarily due to:
?$15 million higher net gains from impacts associated with interest rate and
foreign exchange instruments and foreign currency transactions primarily due to:
•$14 million net losses in 2020 of foreign currency derivatives used to hedge
exposure to fluctuations in the Peruvian sol and Chilean peso related to the
sales of our businesses in Peru and Chile, and
•$14 million higher foreign currency gains on a Mexican peso-denominated loan to
IMG JV, which is offset in Equity Earnings, offset by
•$16 million gains in 2020 on foreign currency derivatives as a result of
fluctuation of the Mexican peso; and
?$8 million lower non-service component of net periodic benefit cost in 2021;
offset by
?$11 million lower investment gains in 2021 on dedicated assets in support of
our executive retirement and deferred compensation plans; and
?$8 million decrease in regulatory interest at the California Utilities due to
the release of a regulatory liability in 2020 related to 2016-2018 forecasting
differences that are not subject to tracking in the income tax expense
memorandum account.
Other income, net, in the six months ended June 30, 2021 was $107 million
compared to other expense, net, of $192 million in the same period in 2020. The
change was primarily due to:
?$242 million lower net losses from impacts associated with interest rate and
foreign exchange instruments and foreign currency transactions primarily due to:
•$5 million foreign currency gains in 2021 compared to $135 million foreign
currency losses in 2020 on a Mexican peso-denominated loan to IMG JV, which is
offset in Equity Earnings, and
•$85 million lower losses on foreign currency derivatives as a result of
fluctuation of the Mexican peso;
?$28 million investment gains in 2021 compared to $7 million investment losses
in 2020 on dedicated assets in support of our executive retirement and deferred
compensation plans;
?$11 million higher non-service component of net periodic benefit credit in
2021; and
?$10 million higher AFUDC equity, including $5 million at both SDG&E and
SoCalGas; offset by
?$8 million decrease in regulatory interest at the California Utilities due to
the release of a regulatory liability in 2020 related to 2016-2018 forecasting
differences that are not subject to tracking in the income tax expense
memorandum account.
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Income Taxes
The table below shows the income tax expense (benefit) and ETRs for Sempra,
SDG&E and SoCalGas.
INCOME TAX EXPENSE (BENEFIT) AND EFFECTIVE INCOME TAX RATES
(Dollars in millions)
                                                 Three months ended June 30,                Six months ended June 30,
                                                   2021                 2020                 2021                 2020
Sempra:
Income tax expense (benefit) from continuing
operations                                   $        139            $    168          $         297           $    (39)

Income from continuing operations before
income taxes
and equity earnings                          $        281            $    463          $       1,049           $    860
Equity earnings, before income tax(1)                 185                  84                    320                 41
Pretax income                                $        466            $    547          $       1,369           $    901

Effective income tax rate                              30    %             31  %                  22   %             (4) %
SDG&E:
Income tax expense                           $         33            $     70          $          78           $    128
Income before income taxes                   $        219            $    263          $         476           $    583
Effective income tax rate                              15    %             27  %                  16   %             22  %
SoCalGas:
Income tax expense                           $          8            $     49          $         102           $    101
Income before income taxes                   $        103            $    196          $         604           $    551
Effective income tax rate                               8    %             25  %                  17   %             18  %


(1)  We discuss how we recognize equity earnings in Note 6 of the Notes to
Consolidated Financial Statements in the Annual Report.
Sempra
Sempra's income tax expense decreased in the three months ended June 30, 2021
compared to the same period in 2020 due to lower pretax income, higher income
tax benefits from forecasted flow-through items, and the following items:
?$22 million income tax benefit in 2021 from the remeasurement of certain
deferred income taxes; offset by
?$83 million income tax expense in 2021 compared to $30 million income tax
expense in 2020 from foreign currency and inflation effects and associated
derivatives.
Sempra's income tax expense in the six months ended June 30, 2021 compared to an
income tax benefit in the same period in 2020 was due to higher pretax income
offset by higher income tax benefits from forecasted flow-through items and the
following items:
?$41 million income tax expense in 2021 compared to $307 million income tax
benefit in 2020 from foreign currency and inflation effects and associated
derivatives; and
?$10 million lower income tax benefit in 2021 related to share-based
compensation; offset by
?$22 million income tax benefit in 2021 from the remeasurement of certain
deferred income taxes.
We discuss the impact of foreign currency exchange rates and inflation on income
taxes below in "Impact of Foreign Currency and Inflation Rates on Results of
Operations." See Note 1 of the Notes to Condensed Consolidated Financial
Statements in this report and Notes 1 and 8 of the Notes to Consolidated
Financial Statements in the Annual Report for further details about our
accounting for income taxes and items subject to flow-through treatment.
SDG&E
SDG&E's income tax expense decreased in both the three months and six months
ended June 30, 2021 compared to the same periods in 2020 primarily due to lower
pretax income and higher income tax benefits from forecasted flow-through items.
SoCalGas
SoCalGas' income tax expense decreased in the three months ended June 30, 2021
compared to the same period in 2020 primarily due to lower pretax income and
higher income tax benefits from forecasted flow-through items.
SoCalGas' income tax expense increased in the six months ended June 30, 2021
compared to the same period in 2020 primarily due to higher pretax income offset
by higher income tax benefits from forecasted flow-through items.
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Equity Earnings
In the three months ended June 30, 2021, equity earnings increased by $80
million (34%) to $313 million compared to the same period in 2020 primarily due
to:
?$50 million equity earnings in 2021 related to our investment in RBS Sempra
Commodities to settle pending VAT matters and related legal costs; and
?$49 million higher equity earnings at Cameron LNG JV primarily due to the
three-train liquefaction project achieving full commercial operations in August
2020; offset by
•$12 million lower equity earnings at IMG JV, primarily due to foreign currency
effects, including $14 million higher foreign currency losses on IMG JV's
Mexican peso-denominated loans from its JV owners, which is fully offset in
Other Income (Expense), Net; and
?$6 million lower equity earnings at Oncor Holdings primarily due to increased
operating costs and expenses attributable to invested capital, offset by higher
revenues from rate updates to reflect increases in invested capital and customer
growth (net of lower consumption primarily due to weather).
In the six months ended June 30, 2021, equity earnings increased by $135 million
(27%) to $631 million compared to the same period in 2020 primarily due to:
?$50 million equity earnings in 2021 compared to $100 million equity losses in
2020 related to our investment in RBS Sempra Commodities to settle pending VAT
matters and related legal costs;
?$126 million higher equity earnings at Cameron LNG JV primarily due to the
three-train liquefaction project achieving full commercial operations in August
2020; and
?$24 million higher equity earnings at Oncor Holdings primarily due to higher
revenues from rate updates to reflect increases in invested capital and customer
growth, offset by increased operating costs and expenses attributable to
invested capital; offset by
?$168 million lower equity earnings at Sempra Mexico, which included:
•$143 million lower equity earnings at IMG JV, primarily due to foreign currency
effects, including $5 million foreign currency losses in 2021 compared to $135
million foreign currency gains in 2020 on IMG JV's Mexican peso-denominated
loans from its JV owners, which is fully offset in Other Income (Expense), Net,
and
•$20 million lower equity earnings at TAG JV primarily due to income tax expense
in 2021 compared to a benefit in 2020.
Earnings Attributable to Noncontrolling Interests
In the three months and six months ended June 30, 2021, earnings attributable to
NCI decreased by $18 million to $10 million and $136 million to $43 million,
respectively, compared to the same periods in 2020 primarily due to a decrease
in earnings attributable to NCI at Sempra Mexico and from the increase in our
ownership interest in IEnova as a result of the exchange offer, which we discuss
in Note 1 of the Notes to Condensed Consolidated Financial Statements.
Preferred Dividends
In the three months and six months ended June 30, 2021, preferred dividends
decreased by $17 million to $20 million and $32 million to $41 million,
respectively, compared to the same periods in 2020 primarily due to the
conversion of series A preferred stock in January 2021, offset by the issuance
of series C preferred stock in June 2020.

IMPACT OF FOREIGN CURRENCY AND INFLATION RATES ON RESULTS OF OPERATIONS
Because our natural gas distribution utility in Mexico, Ecogas, uses its local
currency as its functional currency, revenues and expenses are translated into
U.S. dollars at average exchange rates for the period for consolidation in
Sempra's results of operations. Prior to the sales of our South American
businesses in 2020, our operations in South America used their local currency as
their functional currency. We discuss further the impact of foreign currency and
inflation rates on results of operations, including impacts on income taxes and
related hedging activity, in "Part II - Item 7. MD&A - Impact of Foreign
Currency and Inflation Rates on Results of Operations" in the Annual Report.
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Foreign Currency Translation
Any difference in average exchange rates used for the translation of income
statement activity from year to year can cause a variance in Sempra's
comparative results of operations. In the three months and six months ended June
30, 2021, the change in our earnings as a result of foreign currency translation
rates was not material compared to the same period in 2020.
Transactional Impacts
Income statement activities at our foreign operations and their JVs are also
impacted by transactional gains and losses, a summary of which is shown in the
table below:
TRANSACTIONAL (LOSSES) GAINS FROM FOREIGN CURRENCY AND INFLATION EFFECTS AND ASSOCIATED DERIVATIVES
(Dollars in millions)
                                                                                                  Transactional gains (losses)
                                                       Total reported amounts                     included in reported amounts
                                                                           

Three months ended June 30,

                                                       2021               2020                       2021                2020
Other income (expense), net                        $       72          $     62                $          33          $     18
Income tax (expense) benefit                             (139)             (168)                         (83)              (30)
Equity earnings                                           313               233                          (35)              (17)
Income from continuing operations, net of income
tax                                                       455               528                          (85)              (29)

Income from discontinued operations, net of income tax

                                                         -             1,777                            -                (1)
Earnings attributable to noncontrolling interests         (10)              (28)                          13                 9
Earnings attributable to common shares                    424             2,239                          (72)              (21)
                                                                            

Six months ended June 30,

                                                       2021               2020                       2021                2020
Other income (expense), net                        $      107          $   (192)               $         (16)         $   (258)
Income tax (expense) benefit                             (297)               39                          (41)              307
Equity earnings                                           631               496                          (16)              164
Income from continuing operations, net of income
tax                                                     1,383             1,395                          (73)              213

Income from discontinued operations, net of income tax

                                                         -             1,857                            -                15
Earnings attributable to noncontrolling interests         (43)             (179)                           4               (99)
Earnings attributable to common shares                  1,298             2,999                          (69)              129




CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
Sempra
Impact of the COVID-19 Pandemic
Our businesses that invest in, develop and operate energy infrastructure and
provide electric and gas services to customers have been identified as critical
or essential services in the U.S. and Mexico and have continued to operate
throughout the COVID-19 pandemic. As our businesses continue to operate, our
priority is the safety of our employees, customers, partners and the communities
we serve. We and other companies, including our partners, are taking steps to
try to protect the health and well-being of our employees and other
stakeholders. We continue to work closely with local, state and federal
authorities in an effort to provide essential services with minimum interruption
to customers and in accordance with applicable social distancing and other
orders.
For a further discussion of risks and uncertainties related to the COVID-19
pandemic, see "Part I - Item 1A. Risk Factors" and "Part II - Item 7. MD&A -
Capital Resources and Liquidity" in the Annual Report.
Sempra Infrastructure Partners
In April 2021, we entered into an agreement to sell a 20% equity interest in
Sempra Infrastructure Partners, which generally represents the combined
businesses of Sempra LNG and IEnova under Sempra Global, for cash proceeds of
$3.37 billion, subject
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to adjustments. We anticipate completing this transaction around the end of the
third quarter of 2021. We intend to use the expected proceeds from the sale to
fund capital investments in support of additional growth opportunities and
strengthen our balance sheet by reducing debt.
The completion of the sale of NCI in Sempra Infrastructure Partners will reduce
our ownership interest in Sempra Infrastructure Partners and require us to share
control over certain business decisions with our minority partner, which
introduces a number of risks similar to those associated with sharing business
control. Moreover, any decrease in our ownership of Sempra Infrastructure
Partners would also decrease our share of the cash flows, profits and other
benefits these businesses currently or may in the future produce, which could
materially adversely affect our results of operations, cash flows, financial
condition and/or prospects.
Our ability to complete this transaction is subject to a number of risks,
including, among others, the ability to obtain governmental, regulatory and
third-party approvals and satisfy other customary closing conditions. If we are
not able to obtain these approvals and satisfy all other closing conditions in a
timely manner or on satisfactory terms, then the proposed transaction may be
abandoned and/or our prospects could be materially adversely affected. This
transaction is subject to a number of risks and uncertainties that we discuss
further in "Part I - Item 1A. Risk Factors" in the Annual Report.
Liquidity
We expect to meet our cash requirements through cash flows from operations,
unrestricted cash and cash equivalents, borrowings under our credit facilities,
distributions from our equity method investments, issuances of debt, project
financing and partnering with NCI investors. We believe that these cash flow
sources, combined with available funds, will be adequate to fund our current
operations, including to:
?finance capital expenditures
?meet liquidity requirements
?fund dividends
?fund new business or asset acquisitions or start-ups
?fund capital contribution requirements
?repay long-term debt
?fund expenditures related to the natural gas leak at SoCalGas' Aliso Canyon
natural gas storage facility
Sempra and the California Utilities currently have reasonable access to the
money markets and capital markets and are not currently constrained in their
ability to borrow money at reasonable rates from commercial banks, under
existing revolving credit facilities or through public offerings registered with
the SEC. However, our ability to access the money markets and capital markets or
obtain credit from commercial banks outside of our committed revolving credit
facilities could become materially constrained if changing economic conditions
and disruptions to the money markets and capital markets, due to the COVID-19
pandemic or otherwise, worsen. In addition, our financing activities and actions
by credit rating agencies, as well as many other factors, could negatively
affect the availability and cost of both short-term and long-term financing.
Also, cash flows from operations may be impacted by the timing of commencement
and completion, and potentially cost overruns, of large projects. If cash flows
from operations were to be significantly reduced or we were unable to borrow
under acceptable terms, we would likely first reduce or postpone discretionary
capital expenditures (not related to safety) and investments in new businesses.
We monitor our ability to finance the needs of our operating, investing and
financing activities in a manner consistent with our intention to maintain our
investment-grade credit ratings and capital structure.
We have significant investments in several trusts to provide for future payments
of pensions and other postretirement benefits and nuclear decommissioning.
Changes in asset values, which are dependent on activity in the equity and fixed
income markets, have not materially and adversely affected the trust funds'
abilities to make required payments. However, changes in asset values or other
factors in future periods, such as changes to discount rates, assumed rates of
return, mortality tables and regulations, may impact funding requirements for
pension and other postretirement benefits plans. Funding requirements for
SDG&E's NDT could also be impacted by the timing and amount of SONGS
decommissioning costs. At the California Utilities, funding requirements are
generally recoverable in rates. We discuss our employee benefit plans and
SDG&E's NDT, including our investment allocation strategies for assets in these
trusts, in Notes 9 and 15, respectively, of the Notes to Consolidated Financial
Statements in the Annual Report.
Available Funds
Our committed lines of credit provide liquidity and support commercial paper. As
we discuss in Note 7 of the Notes to Condensed Consolidated Financial
Statements, Sempra, SDG&E and SoCalGas each have five-year credit agreements
expiring in 2024. In addition, Sempra Mexico has committed lines of credit that
expire in 2021 and 2024 and uncommitted revolving credit facilities
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that expire in 2023. Sempra Infrastructure Partners may enter into its own
revolving credit facility, although such a credit facility and its timing remain
uncertain.
The table below shows the amount of available funds at June 30, 2021, including
available unused credit on these primary U.S. and foreign lines of credit.
AVAILABLE FUNDS AT JUNE 30, 2021
(Dollars in millions)
                                             Sempra      SDG&E       

SoCalGas

Unrestricted cash and cash equivalents(1) $ 335 $ 13 $ 4 Available unused credit(2)(3)

                6,319       1,063            607


(1)  Amounts at Sempra include $140 million held in non-U.S. jurisdictions. We
discuss repatriation in Note 8 of the Notes to Consolidated Financial Statements
in the Annual Report.
(2)  Available unused credit is the total available on Sempra's, SDG&E's,
SoCalGas' and Sempra Mexico's credit facilities that we discuss in Note 7 of the
Notes to Condensed Consolidated Financial Statements.
(3)  Because our commercial paper programs are supported by these lines, we
reflect the amount of commercial paper outstanding as a reduction to the
available unused credit.
Short-Term Borrowings
We use short-term debt primarily to meet liquidity requirements, fund
shareholder dividends, and temporarily finance capital expenditures,
acquisitions or start-ups. Our California Utilities use short-term debt
primarily to meet working capital needs. Revolving lines of credit and
commercial paper were our primary sources of short-term debt funding in the
first six months of 2021. In June 2021, SDG&E entered into a $375 million,
364-day term loan with a maturity date of June 27, 2022. At June 30, 2021, there
were no borrowings outstanding under this agreement. In July 2021, SDG&E
borrowed $200 million, net of negligible issuance costs, under the term loan.
The borrowing bears interest at benchmark rates plus 62.5 bps. The term loan
provides SDG&E with additional liquidity outside of its line of credit.
We discuss our short-term debt activities in Note 7 of the Notes to Condensed
Consolidated Financial Statements.
Long-Term Debt Activities
Issuances of and payments on long-term debt in the first six months of 2021
included the following:
LONG-TERM DEBT ISSUANCES AND PAYMENTS
(Dollars in millions)
Issuances:                                         Amount at issuance       

Maturity

Sempra LNG variable rate notes                    $               185             2025

Payments:                                               Payments            Maturity
Sempra variable rate notes                        $               850             2021
SDG&E 1.914% amortizing first mortgage bonds                       18       

2021

SDG&E variable rate 364-day term loan                             200       

2021

Sempra Mexico variable rate notes                                  22       

2021

Sempra Mexico variable and fixed rate loans                        20       

2021

We discuss our long-term debt activities in Note 7 of the Notes to Condensed
Consolidated Financial Statements.
Credit Ratings
We provide additional information about the credit ratings of Sempra, SDG&E and
SoCalGas in "Part I - Item 1A. Risk Factors" and "Part II - Item 2. MD&A -
Capital Resources and Liquidity" in the Annual Report.
The credit ratings of Sempra, SDG&E and SoCalGas remained at investment grade
levels in the first six months of 2021.
CREDIT RATINGS AT JUNE 30, 2021

                                           Sempra                              SDG&E                            SoCalGas
Moody's                          Baa2 with a stable outlook          A3 with a stable outlook           A2 with a stable outlook
S&P                             BBB+ with a negative outlook        BBB+ with a stable outlook         A with a negative outlook
Fitch                            BBB+ with a stable outlook         BBB+ with a stable outlook          A with a stable outlook


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A downgrade of Sempra's or any of its subsidiaries' credit ratings or rating
outlooks may, depending on the severity, result in a requirement for collateral
to be posted in the case of certain financing arrangements and may materially
and adversely affect the market prices of their equity and debt securities, the
rates at which borrowings are made and commercial paper is issued, and the
various fees on their outstanding credit facilities. This could make it more
costly for Sempra, SDG&E, SoCalGas and Sempra's other subsidiaries to issue debt
securities, to borrow under credit facilities and to raise certain other types
of financing.
Sempra has agreed that, if the credit rating of Oncor's senior secured debt by
any of the three major rating agencies falls below BBB (or the equivalent),
Oncor will suspend dividends and other distributions (except for contractual tax
payments), unless otherwise allowed by the PUCT. Oncor's senior secured debt was
rated A2, A+ and A at Moody's, S&P and Fitch, respectively, at June 30, 2021.
Loans with Affiliates
At June 30, 2021, Sempra had $704 million in loans due from unconsolidated
affiliates and $304 million in loans due to unconsolidated affiliates.
California Utilities
SDG&E's and SoCalGas' operations have historically provided relatively stable
earnings and liquidity. Their future performance and liquidity will depend
primarily on the ratemaking and regulatory process, environmental regulations,
economic conditions, actions by the California legislature, litigation and the
changing energy marketplace, as well as other matters described in this report.
SDG&E and SoCalGas expect that the available unused credit from their credit
facilities described above, cash flows from operations, and debt issuances will
continue to be adequate to fund their respective current operations and planned
capital expenditures. The California Utilities manage their capital structure
and pay dividends when appropriate and as approved by their respective boards of
directors.
As we discuss in Note 4 of the Notes to Condensed Consolidated Financial
Statements in this report and in Note 4 of the Notes to Consolidated Financial
Statements in the Annual Report, changes in balancing accounts for significant
costs at SDG&E and SoCalGas, particularly a change between over- and
undercollected status, may have a significant impact on cash flows. These
changes generally represent the difference between when costs are incurred and
when they are ultimately recovered in rates through billings to customers.
COVID-19 Pandemic Protections
The California Utilities are continuing to monitor the impacts of the COVID-19
pandemic on cash flows and results of operations. Some customers have
experienced and continue to experience a diminished ability to pay their
electric or gas bills, leading to slower payments and higher levels of
nonpayment than has been the case historically. These impacts could become
significant and could require modifications to our financing plans.
The CPUC required that all energy companies under its jurisdiction, including
the California Utilities, take action to implement several emergency customer
protection measures to support California customers affected by the COVID-19
pandemic. The California Utilities implemented certain measures to assist all
customers (except for SoCalGas' noncore customers) in response to these
requirements, including suspending service disconnections due to nonpayment,
waiving late payment fees, and offering flexible payment plans to customers
experiencing difficulty paying their electric or gas bills. The customer
protection measures were in place through June 2021. In June 2021, the CPUC
further extended the suspension of service disconnections for nonpayment through
September 2021, which provides time for the California Utilities to notify
residential and small business customers in arrears and enroll such customers in
long-term repayment plans. The CPUC is continuing to consider the impacts of any
state or federal relief programs on customer arrearages and if further debt
relief is warranted.
The CPUC authorized each of the California Utilities to track and request
recovery of incremental costs associated with complying with residential
customer protection measures implemented by the CPUC related to the COVID-19
pandemic, including costs associated with suspending service disconnections and
uncollectible expenses that arise from customers' failure to pay. Although we
are tracking these costs in various regulatory mechanisms, recovery is not
assured. The continuation of these circumstances could result in a further
reduction in payments received from the California Utilities' customers and a
further increase in uncollectible accounts, which could become material, and any
inability or delay in recovering all or a substantial portion of these costs
could have a material adverse effect on the cash flows, financial condition and
results of operations of Sempra, SDG&E and SoCalGas. We discuss regulatory
mechanisms in Note 4 of the Notes to Condensed Consolidated Financial
Statements.
Disconnection OIR
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In June 2020, the CPUC issued a decision addressing residential service
disconnections that, among other things, allows each of the California Utilities
to establish a two-way balancing account to record the uncollectible expenses
associated with residential customers' inability to pay their electric or gas
bills. This decision also directs the California Utilities to establish an AMP
that provides successfully participating, income-qualified residential customers
with relief from outstanding utility bill amounts and became effective in
February 2021. The California Utilities have recorded increases in their
allowances for uncollectible accounts primarily related to expected forgiveness
of outstanding bill amounts for customers eligible under the AMP. The AMP could
result in a further reduction in payments received from the California
Utilities' customers and a further increase to uncollectible accounts, which
could become material, and any inability to recover these costs could have a
material adverse effect on the cash flows, financial condition and results of
operations of Sempra, SDG&E and SoCalGas.
CCM
A CPUC cost of capital proceeding determines a utility's authorized capital
structure and authorized return on rate base. A cost of capital proceeding also
addresses the CCM, which considers changes in interest rates based on the
applicable utility bond index published by Moody's (the CCM benchmark rate) for
the 12-month period from October 2020 through September 2021. The CCM benchmark
rate is the basis of comparison to determine if further measurement periods
"trigger" the CCM. The trigger occurs if the change in the applicable Moody's
utility bond index relative to the CCM benchmark rate is larger than plus or
minus 1.000%. The index applicable to SDG&E and SoCalGas is based on each
utility's credit rating.
SDG&E's CCM benchmark rate is 4.498% based on Moody's Baa- utility bond index,
and SoCalGas' CCM benchmark rate is 4.029%, based on Moody's A- utility bond
index.
The average Moody's Baa- utility bond index between October 1, 2020 and July 30,
2021 was more than 1.000% below SDG&E's CCM benchmark rate of 4.498%. The CCM,
if triggered in 2021 by SDG&E or SoCalGas, would be effective January 1, 2022,
and would automatically update their respective authorized cost of debt based on
actual costs and update their respective authorized ROE. A trigger of the CCM
that requires a downward adjustment beginning January 1, 2022 could materially
adversely affect the results of operations and cash flows of Sempra and,
depending on the CCM that is triggered, SDG&E or SoCalGas. We discuss the CCM
further in Note 4 of the Notes to Consolidated Financial Statements in the
Annual Report.
SDG&E
Wildfire Fund
The carrying value of SDG&E's Wildfire Fund asset totals $378 million at
June 30, 2021. We describe the Wildfire Legislation and related accounting
treatment in Note 1 of the Notes to Consolidated Financial Statements in the
Annual Report.
SDG&E is exposed to the risk that the participating California electric IOUs may
incur third-party wildfire costs for which they will seek recovery from the
Wildfire Fund. In such a situation, SDG&E may recognize a reduction of its
Wildfire Fund asset and record a charge against earnings in the period when
there is a reduction of the available coverage due to recoverable claims from
any of the participating IOUs. As a result, if any California electric IOU's
equipment is determined to be a cause of a fire, it could have a material
adverse effect on SDG&E's and Sempra's financial condition and results of
operations up to the carrying value of our Wildfire Fund asset, with additional
potential material exposure if SDG&E's equipment is determined to be a cause of
a fire. In addition, the Wildfire Fund could be completely exhausted due to
fires in the other California electric IOUs' service territories, by fires in
SDG&E's service territory or by a combination thereof. In the event that the
Wildfire Fund is materially diminished, exhausted or terminated, SDG&E will lose
the protection afforded by the Wildfire Fund, and as a consequence, a fire in
SDG&E's service territory could cause a material adverse effect on SDG&E's and
Sempra's cash flows, results of operations and financial condition.
Wildfire Cost Recovery Mechanism
In July 2021, SDG&E filed a request with the CPUC to establish an interim cost
recovery mechanism that would recover in rates 50% of its wildfire mitigation
plan regulatory account balance as of January 1 of each year. Such potential
recovery would be incremental to wildfire costs authorized in its GRC and would
be subject to reasonableness review.
Franchise Agreements
In December 2020, the City of San Diego and SDG&E agreed to extend the natural
gas and electric franchises to June 1, 2021. After completing a competitive bid
process, on June 8, 2021, the City of San Diego approved ordinances granting to
SDG&E the natural gas and electric franchises. These franchise agreements
provide SDG&E the opportunity to serve the City of San Diego for the next 20
years, consisting of 10-year agreements that will automatically renew for an
additional 10 years unless the City Council voids the automatic renewal with a
supermajority vote. The agreements went into effect in July 2021. SDG&E will pay
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$110 million as consideration for the natural gas and electric franchise
agreements. The consideration paid will not be recovered from customers and will
be amortized over 20 years.
Two lawsuits have been filed in California Superior Court challenging the City's
process for its award of the natural gas and electric franchises and seeking to
declare the franchise agreements as null and void.
SoCalGas
SoCalGas' future performance and liquidity will be impacted by the resolution of
legal, regulatory and other matters concerning the Leak, which we discuss below
and in Note 11 of the Notes to Condensed Consolidated Financial Statements in
this report and in "Part I - Item 1A. Risk Factors" in the Annual Report.
Aliso Canyon Natural Gas Storage Facility Gas Leak
From October 23, 2015 through February 11, 2016, SoCalGas experienced a natural
gas leak from one of the injection-and-withdrawal wells, SS25, at its Aliso
Canyon natural gas storage facility located in Los Angeles County. In February
2016, CalGEM confirmed that the well was permanently sealed.
Cost Estimates, Accounting Impact and Insurance. At June 30, 2021, SoCalGas
estimates certain costs related to the Leak are $1,627 million (the cost
estimate). This cost estimate may increase significantly as more information
becomes available. A substantial portion of the cost estimate has been paid, and
$422 million is accrued as Reserve for Aliso Canyon Costs on SoCalGas' and
Sempra's Condensed Consolidated Balance Sheets.
Except for the amounts paid or estimated to settle certain legal and regulatory
matters, the cost estimate does not include litigation, regulatory proceedings
or regulatory costs to the extent it is not possible to predict at this time the
outcome of these actions or reasonably estimate the costs to defend or resolve
the actions or the amount of damages, restitution, civil or administrative
fines, sanctions, penalties or other costs or remedies that may be imposed or
incurred. The cost estimate also does not include certain other costs incurred
by Sempra associated with defending against shareholder derivative lawsuits and
other potential costs that we currently do not anticipate incurring or that we
cannot reasonably estimate. These costs not included in the cost estimate could
be significant and could have a material adverse effect on SoCalGas' and
Sempra's cash flows, financial condition and results of operations.
We have received insurance payments for many of the costs included in the cost
estimate, including temporary relocation and associated processing costs,
control-of-well expenses, costs of the government-ordered response to the Leak,
certain legal costs and lost gas. As of June 30, 2021, we recorded the expected
recovery of the cost estimate related to the Leak of $414 million as Insurance
Receivable for Aliso Canyon Costs on SoCalGas' and Sempra's Condensed
Consolidated Balance Sheets. This amount is exclusive of insurance retentions
and $865 million of insurance proceeds we received through June 30, 2021. We
intend to pursue the full extent of our insurance coverage for the costs we have
incurred. Other than insurance for certain future defense costs we may incur as
well as directors' and officers' liability, we have exhausted all of our
insurance in this matter. We continue to pursue other sources of insurance
coverage for costs related to this matter, but we may not be successful in
obtaining additional insurance recovery for any of these costs. If we are not
able to secure additional insurance recovery, if any costs we have recorded as
an insurance receivable are not collected, if there are delays in receiving
insurance recoveries, or if the insurance recoveries are subject to income taxes
while the associated costs are not tax deductible, such amounts, which could be
significant, could have a material adverse effect on SoCalGas' and Sempra's cash
flows, financial condition and results of operations.
Natural Gas Storage Operations and Reliability. Natural gas withdrawn from
storage is important for service reliability during peak demand periods,
including peak electric generation needs in the summer and consumer heating
needs in the winter. The Aliso Canyon natural gas storage facility is the
largest SoCalGas storage facility and an important element of SoCalGas' delivery
system. As a result of the Leak, the CPUC has issued a series of directives to
SoCalGas specifying the range of working gas to be maintained in the Aliso
Canyon natural gas storage facility as well as protocols for the withdrawal of
gas, to support safe and reliable natural gas service. In February 2017, the
CPUC opened a proceeding pursuant to the SB 380 OII to determine the feasibility
of minimizing or eliminating the use of the Aliso Canyon natural gas storage
facility while still maintaining energy and electric reliability for the region,
including considering alternative means for meeting or avoiding the demand for
the facility's services if it were eliminated.
If the Aliso Canyon natural gas storage facility were to be permanently closed,
or if future cash flows from its operation were otherwise insufficient to
recover its carrying value, it could result in an impairment of the facility and
significantly higher than expected operating costs and/or additional capital
expenditures, and natural gas reliability and electric generation could be
jeopardized. At June 30, 2021, the Aliso Canyon natural gas storage facility had
a net book value of $858 million. Any significant impairment of this asset, or
higher operating costs and additional capital expenditures incurred by SoCalGas
that may not be recoverable in customer rates, could have a material adverse
effect on SoCalGas' and Sempra's results of operations, financial
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condition and cash flows.
Sempra Texas Utilities
Oncor relies on external financing as a significant source of liquidity for its
capital requirements. In the event that Oncor fails to meet its capital
requirements or is unable to access sufficient capital to finance its ongoing
needs, we may elect to make additional capital contributions to Oncor (as our
commitments to the PUCT prohibit us from making loans to Oncor) which could be
substantial and which would reduce the cash available to us for other purposes,
could increase our indebtedness and could ultimately materially adversely affect
our results of operations, liquidity, financial condition and prospects. Oncor's
ability to pay dividends may be limited by factors such as its credit ratings,
regulatory capital requirements, debt-to-equity ratio approved by the PUCT and
other restrictions. In addition, Oncor will not pay dividends if a majority of
Oncor's independent directors or any minority member director determines it is
in the best interests of Oncor to retain such amounts to meet expected future
requirements.
In July 2021, Sempra contributed $50 million to Oncor Holdings, and Oncor
Holdings distributed a $438 million return of investment to Sempra.
Winter Weather Event
In February 2021, ERCOT required transmission companies, including Oncor, to
significantly reduce demand on the grid due to insufficient electricity
generation caused by extreme winter weather, resulting in power outages
throughout ERCOT. As a result of the winter weather event, the PUCT issued a
moratorium on customer disconnections due to nonpayment until June 18, 2021, and
it or other governmental authorities or third parties, including Oncor's
customers, have taken or could take other measures to address financial
challenges experienced as a result of the event, which could adversely impact
Oncor's collections and cash flows and, in turn, could adversely impact Sempra.
The Texas Legislature has passed, and the Governor of Texas has signed, various
legislation affecting the ERCOT market, which addresses matters including
certain weatherization requirements and fines of up to $1 million per day for
failures to comply with such requirements, creation of the Texas Energy
Reliability Council, identification of gas facilities that are critical to
electric-generator fuel supplies, coordination between the gas and electric
industries, and changes in the composition of the PUCT and the ERCOT board of
directors. In addition, various regulatory and governmental entities have also
commenced investigations or indicated an intent to investigate the operation of
the ERCOT grid during this extreme winter weather event and potential future
actions to improve grid reliability. Any significant changes relating to the
ERCOT market that impact transmission and distribution utilities as a result of
such proceedings or otherwise could materially adversely impact Oncor. If Oncor
does not successfully respond to these changes and any other legislative,
regulatory, or market or industry developments applicable to it, Oncor could
suffer a deterioration in its results of operations, financial condition, cash
flows and/or prospects, which could materially adversely affect Sempra's results
of operations, financial condition, cash flows and/or prospects.
Sempra Mexico
Construction Projects
Sempra Mexico began commercial operations of its new terminals for the receipt,
storage and delivery of refined fuel products in the new port of Veracruz on
March 19, 2021 and in Mexico City on July 2, 2021. The two terminals have a
combined storage capacity of more than 2.6 million barrels. The storage capacity
for both terminals is contracted with Valero Energy Corporation. Sempra Mexico
also completed construction and began commercial operations of a new solar
facility (Border Solar) in Juárez, Chihuahua on March 25, 2021.
Sempra Mexico is currently constructing additional terminals for the receipt,
storage, and delivery of liquid fuels in the vicinity of Puebla and Topolobampo.
We expect these projects to commence commercial operations in 2021. However,
expected commencement dates could be delayed by worsening or extended
disruptions of project construction caused by the COVID-19 pandemic or other
factors outside our control. Sempra Mexico is continuing to monitor the impacts
of the COVID-19 pandemic on cash flows and results of operations. We expect to
fund these capital expenditures, investments and operations at IEnova with
available funds, including credit facilities, and funds internally generated by
the Sempra Mexico businesses, as well as funds from project financing, sales of
securities, interim funding from the parent or affiliates, and partnering in
JVs. Sempra Mexico is also developing terminals for the receipt, storage, and
delivery of liquid fuels in the vicinity of Manzanillo, Guadalajara and
Ensenada.
The ability to successfully complete major construction projects is subject to a
number of risks and uncertainties. For a discussion of these risks and
uncertainties, see "Part I - Item 1A. Risk Factors" in the Annual Report.
Legal and Regulatory Matters
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As we discuss in Note 11 of the Notes to Condensed Consolidated Financial
Statements, the Guaymas-El Oro segment of the Sonora pipeline has been
inoperable since August 2017. Under an agreement between IEnova and the CFE, the
CFE will resume making payments only when the damaged section of the Guaymas-El
Oro segment of the Sonora pipeline is repaired. If the pipeline is not repaired
by September 14, 2021 and the parties do not agree on a new service start date,
IEnova retains the right to terminate the contract and seek to recover its
reasonable and documented costs and lost profits. At June 30, 2021, Sempra
Mexico had $439 million in PP&E, net, related to the Guaymas-El Oro segment of
the Sonora pipeline, which could be subject to impairment if IEnova is unable to
make such repairs (which have not commenced) or re-route the pipeline (which has
not been agreed to by the parties) and resume operations in the Guaymas-El Oro
segment of the Sonora pipeline or if IEnova terminates the contract and is
unable to obtain recovery, which in each case could have a material adverse
impact on Sempra's results of operations, financial condition, cash flows,
and/or prospects.
In May 2020, the two third-party capacity customers at the ECA Regas Facility,
Shell Mexico and Gazprom, asserted that a 2019 update of the general terms and
conditions for service at the facility, as approved by the CRE, resulted in a
breach of contract by IEnova and a force majeure event. Citing these
circumstances, the customers subsequently stopped making payments of amounts due
under their respective LNG storage and regasification agreements. IEnova has
rejected the customers' assertions and has drawn on the customers' letters of
credit provided as payment security. The parties engaged in discussions under
the applicable contractual dispute resolution procedures without coming to a
mutually acceptable resolution. In July 2020, Shell Mexico submitted a request
for arbitration of the dispute and although Gazprom has joined the proceeding,
Gazprom has since replenished the amounts drawn on its letter of credit and has
resumed making regular monthly payments under its LNG storage and regasification
agreement. As a consequence, IEnova is not currently drawing on Gazprom's letter
of credit but expects to continue to draw on Shell Mexico's letter of credit.
IEnova intends to avail itself of its available claims, defenses, rights and
remedies in the arbitration proceeding, including seeking dismissal of the
customers' claims. In addition to the arbitration proceeding, Shell Mexico also
filed a constitutional challenge to the CRE's approval of the update to the
general terms and conditions and an additional constitutional claim against the
issuance of the liquefaction permit. Shell Mexico's request to stay the CRE's
approval of the general terms and conditions was denied in October 2020, and the
claim regarding the liquefaction permit issuance was denied in March 2021. Shell
Mexico has appealed both decisions.
As we discuss in Note 11 of the Notes to Condensed Consolidated Financial
Statements, the Mexican government and certain Mexican governmental agencies
have amended existing laws and rules, updated transmission rates, and issued
orders, decrees and regulations that could materially impact IEnova's
participation in the country's energy market. Those actions would, among other
things, create barriers for renewable energy facilities to enter the wholesale
electricity market, threaten the prospects for private-party renewable energy
generation in the country, limit the ability to dispatch renewable energy and to
receive or maintain operation permits (including self-supply permits impacted by
the Offtaker Resolution), and increase costs of electricity for legacy
renewables and cogeneration energy contract holders. In addition, those actions
(i) require that only state-owned companies may import and export hydrocarbons,
refined products, petrochemicals, and biofuels through channels other than those
authorized, which could adversely affect new projects that have not obtained
such authorizations and projects under construction, in development or in
operation, and (ii) grant SENER and the CRE additional powers to suspend and
revoke permits related to the midstream and downstream sectors. Some of these
newly enacted amendments, orders, rules, decrees and regulations have been
challenged or temporarily suspended through litigation and judicial rulings
obtained by businesses operating in the power sector, including by IEnova. If
the ongoing litigation is unsuccessful or if new orders, rules, decrees or
regulations or further amendments to existing laws are adopted or enacted that
adversely impact IEnova's participation in the Mexican energy market, this could
have a material adverse effect on our business, financial condition, results of
operations, cash flows and/or prospects, our ability to recover the carrying
values of our renewable energy and other investments in Mexico, and our ability
to operate existing facilities and develop new energy projects in the country.
Acquisition of ESJ
As we discuss in Note 5 of the Notes to Condensed Consolidated Financial
Statements, on March 19, 2021, IEnova increased its ownership interest in ESJ
from 50% to 100% by acquiring Saavi Energía's 50% equity interest in ESJ for a
purchase price of approximately $65 million (net of $14 million of acquired cash
and cash equivalents) plus the assumption of $277 million in debt (including $94
million owed from ESJ to IEnova that eliminates upon consolidation). ESJ owns a
fully operating wind power generation facility with a nameplate capacity of 155
MW that is fully contracted by SDG&E under a long-term PPA. ESJ is constructing
a second wind power generation facility with a nameplate capacity of 108 MW that
we expect will be completed in the first quarter of 2022.
IEnova Exchange Offer and Cash Tender Offer
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In May 2021, we acquired 381,015,194 publicly held shares of IEnova in exchange
for 12,306,777 newly issued shares of our common stock upon completion of our
exchange offer launched in the U.S. and Mexico. In addition to being traded on
the New York Stock Exchange, Sempra's common stock is now also listed on the
Mexican Stock Exchange under the ticker symbol SRE.MX. We acquired the IEnova
shares at an exchange ratio of 0.0323 shares of our common stock for each one
IEnova ordinary share. In connection with the exchange offer, we recorded an
increase in Sempra's shareholders' equity of $1,361 million, net of $12 million
in transactions costs, and increased our ownership interest in IEnova from 70.2%
to 96.4%.
We intend to launch a tender offer to acquire for cash the remaining 52,227,526
publicly held shares of IEnova that were not tendered in the exchange offer in
the third quarter of 2021.
Sempra LNG
Sempra LNG is pursuing development of additional LNG export facilities on the
Gulf Coast and Pacific Coast of North America through its proposed Cameron LNG
JV Phase 2 liquefaction expansion project in Louisiana, ECA LNG liquefaction
export projects in Mexico, and Port Arthur LNG liquefaction export project in
Texas. Sempra LNG will require funding for the development and expansion of its
portfolio of projects, which may be financed through a combination of operating
cash flows, funding from the parent, bank financing, project financing and
participating in JVs.
Cameron LNG JV Liquefaction Expansion Project (Phase 2)
Cameron LNG JV has received the major permits and FTA and non-FTA approvals
necessary to expand the current configuration of the Cameron LNG JV liquefaction
project beyond Phase 1. The permits for the Phase 2 project include up to two
additional liquefaction trains and up to two additional full containment LNG
storage tanks. We expect the proposed expansion project will initially have one
train with offtake capacity of over 6 Mtpa, with the ability to increase
capacity with debottlenecking, and the site can accommodate additional trains
beyond Phase 2.
Sempra has entered MOUs with TOTAL SE, Mitsui & Co., Ltd. and Mitsubishi
Corporation that provide a framework for cooperation for the development of and
100% of the offtake from the potential Cameron LNG JV Phase 2 project. The
ultimate participation of and offtake by TOTAL SE, Mitsui & Co., Ltd. and
Mitsubishi Corporation remains subject to negotiation and finalization of
definitive agreements, among other factors, and TOTAL SE, Mitsui & Co., Ltd. and
Mitsubishi Corporation have no commitment to participate in or enter into
offtake agreements with the Phase 2 project until such definitive agreements are
established.
Expansion of the Cameron LNG JV liquefaction facility beyond the first three
trains is subject to certain restrictions and conditions under the JV project
financing agreements, including among others, timing restrictions on expansion
of the project unless appropriate prior consent is obtained from the Phase 1
project lenders. Under the Cameron LNG JV equity agreements, the expansion of
the project requires the unanimous consent of all the partners, including with
respect to the equity investment obligation of each partner. Discussions among
all the Cameron LNG JV partners have been taking place regarding how an
expansion may be structured and we expect that discussions will continue.
Although we are working towards making a final investment decision around the
end of 2022, there is no assurance that the Cameron LNG JV members will
unanimously agree in a timely manner or at all on an expansion structure, which,
if not accomplished, would materially and adversely impact the development of
the Phase 2 project.
The development of the potential Cameron LNG JV Phase 2 project is subject to
numerous other risks and uncertainties, including securing binding customer
commitments; reaching unanimous agreement with our partners to proceed;
obtaining a number of permits and regulatory approvals; securing financing;
negotiating and completing suitable commercial agreements, including a
definitive EPC contract, equity acquisition and governance agreements; reaching
a positive final investment decision; and other factors associated with this
potential investment. For a discussion of these risks, see "Part I - Item 1A.
Risk Factors" in the Annual Report.
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ECA LNG Liquefaction Export Projects
Sempra LNG and IEnova are developing two natural gas liquefaction export
projects at IEnova's existing ECA Regas Facility. The liquefaction export
projects, which are planned for development in two phases (a mid-scale project
by ECA LNG Phase 1 that is under construction and a proposed large-scale project
by ECA LNG Phase 2), are being developed to provide buyers with direct access to
North American west coast LNG supplies. We do not expect the construction of the
ECA LNG Phase 1 project to disrupt operations at the ECA Regas Facility.
However, construction of the ECA LNG Phase 2 project would conflict with the
current operations at the ECA Regas Facility, which currently has long-term
regasification contracts for 100% of the regasification facility's capacity
through 2028, making the decisions on whether and how to pursue the ECA LNG
Phase 2 project dependent in part on whether the investment in a large-scale
liquefaction facility would, over the long term, be more beneficial financially
than continuing to supply regasification services under our existing contracts.
We have planned measures to limit disruption of operations at the ECA Regas
Facility with the construction of the ECA LNG Phase 1 project.
In March 2019, ECA LNG received two authorizations from the DOE to export
U.S.-produced natural gas to Mexico and to re-export LNG to non-FTA countries
from its ECA LNG Phase 1 project, which is a one-train natural gas liquefaction
facility with a nameplate capacity of 3.25 Mtpa and initial offtake capacity of
approximately 2.5 Mtpa that is under construction, and its proposed ECA LNG
Phase 2 project that is in development.
In April 2020, ECA LNG Phase 1 executed definitive 20-year LNG sale and purchase
agreements with Mitsui & Co., Ltd. for approximately 0.8 Mtpa of LNG and with an
affiliate of TOTAL SE for approximately 1.7 Mtpa of LNG. In December 2020, an
affiliate of TOTAL SE acquired a 16.6% ownership interest in ECA LNG Phase 1,
with Sempra LNG and IEnova each retaining a 41.7% ownership interest. Our MOU
with Mitsui & Co., Ltd. provides a framework for Mitsui & Co., Ltd.'s potential
offtake of LNG from, and potential acquisition of an equity interest in, ECA LNG
Phase 2.
In February 2020, we entered into an EPC contract with Technip Energies for the
engineering, procurement and construction of the ECA LNG Phase 1 project. Since
reaching a positive final investment decision with respect to the project in
November 2020, we released Technip Energies to commence work to construct the
ECA LNG Phase 1 project. The total price of the EPC contract is estimated at
approximately $1.5 billion. We estimate that capital expenditures will
approximate $2.0 billion, including capitalized interest and project
contingency. The actual cost of the EPC contract and the actual amount of these
capital expenditures may differ, perhaps substantially, from our estimates. We
expect ECA LNG Phase 1 to begin producing LNG by the end of 2024.
In December 2020, ECA LNG Phase 1 entered into a five-year loan agreement for an
aggregate principal amount of up to $1.6 billion, of which $202 million was
outstanding at June 30, 2021. Proceeds from the loan are being used to finance
the cost of construction of the ECA LNG Phase 1 project. We discuss the details
of this loan in Note 7 of the Notes to Condensed Consolidated Financial
Statements in this report and in Note 7 of the Notes to Consolidated Financial
Statements in the Annual Report.
The construction of the ECA LNG Phase 1 project and the development of the
potential ECA LNG Phase 2 project are subject to numerous risks and
uncertainties. For Phase 1, these include maintaining permits and regulatory
approvals; construction delays; securing and maintaining commercial
arrangements, such as gas supply and transportation agreements; and other
factors associated with the project and its construction. For Phase 2, these
include obtaining binding customer commitments; the receipt of a number of
permits and regulatory approvals; obtaining financing; negotiating and
completing suitable commercial agreements, including a definitive EPC contract,
equity acquisition and governance agreements, LNG sales agreements and gas
supply and transportation agreements; reaching a positive final investment
decision; and other factors associated with this potential investment. In
addition, as we discuss in Note 11 of the Notes to Condensed Consolidated
Financial Statements, an unfavorable decision on certain property disputes or
permit challenges, an unfavorable judgment that does not allow IEnova to secure
new or renew existing LDA authorizations, or an extended dispute with existing
customers at the ECA Regas Facility, could materially adversely affect the
development and construction of these projects and Sempra's financial condition,
results of operations, cash flows and prospects, including the impairment of all
or a substantial portion of the capital costs invested in the projects to date.
For a discussion of these risks, see "Part I - Item 1A. Risk Factors" in the
Annual Report.
Port Arthur LNG Liquefaction Export Project
Sempra LNG is developing a proposed natural gas liquefaction export project on a
greenfield site that it owns in the vicinity of Port Arthur, Texas, located
along the Sabine-Neches waterway. Sempra LNG received authorizations from the
DOE in August 2015 and May 2019 that collectively permit the LNG to be produced
from the proposed Port Arthur LNG project to be exported to all current and
future FTA and non-FTA countries.
In April 2019, the FERC approved the siting, construction and operation of the
proposed Port Arthur LNG liquefaction facility, along with certain natural gas
pipelines, including the Louisiana Connector and Texas Connector Pipelines, that
could be used to
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supply feed gas to the liquefaction facility, assuming the project is completed.
In February 2020, Sempra LNG filed a FERC application for the siting,
construction and operation of a second phase at the proposed Port Arthur LNG
facility, including the potential addition of two liquefaction trains.
In February 2020, we entered into an EPC contract with Bechtel for the proposed
Port Arthur LNG liquefaction project. The EPC contract contemplates the
construction of two liquefaction trains with a nameplate capacity of
approximately 13.5 Mtpa, two LNG storage tanks, a marine berth and associated
loading facilities and related infrastructure necessary to provide liquefaction
services. We have no obligation to move forward on the EPC contract, and we may
release Bechtel to perform portions of the work pursuant to limited notices to
proceed. We have the option to fully release Bechtel to perform all of the work
to construct the Port Arthur LNG liquefaction export project only after we reach
a positive final investment decision with respect to the project and after
certain other conditions are met, including obtaining project financing. In
December 2020, we amended and restated the EPC contract to reflect an estimated
price of approximately $8.7 billion. Since we did not issue a full notice to
proceed by July 15, 2021, agreement by both parties on an amendment to the EPC
contract is necessary. Such amendment may adjust the EPC contract price and the
EPC schedule and could potentially include other changes to the work and terms
and conditions of the EPC contract prior to Port Arthur LNG having the right to
issue a full notice to proceed thereunder. Any agreement on such an amendment by
both parties or on favorable terms to Sempra cannot be assured.
In December 2018, Polish Oil & Gas Company (PGNiG) and Port Arthur LNG entered
into a definitive 20-year agreement for the sale and purchase of 2 Mtpa of LNG
per year from the Port Arthur LNG liquefaction export project. In July 2021, the
agreement was terminated and PGNiG and Sempra LNG entered into an MOU to
collaborate to transition the 2 Mtpa to Sempra LNG's portfolio of projects.
In May 2019, Aramco Services Company and Sempra LNG signed a Heads of Agreement
for the negotiation of a definitive 20-year LNG sale and purchase agreement for
5 Mtpa of LNG offtake from the Port Arthur LNG liquefaction export project. The
Heads of Agreement also included the negotiation of a potential 25% equity
investment in the project. In January 2020, Aramco Services Company and Sempra
LNG signed an Interim Project Participation Agreement related to the proposed
project. In June 2021, Aramco Services Company and Sempra LNG agreed to allow
the Heads of Agreement and Interim Project Participation Agreement to expire.
In November 2019, Port Arthur LNG commenced the relocation and upgrade of
approximately three miles of highway where the Port Arthur LNG liquefaction
export project would be located.
We continue to progress development of the proposed Port Arthur LNG liquefaction
export project and are evaluating design changes that could reduce overall
emissions, including electric drives, renewable power sourcing and other
technological solutions. Given the impact of the COVID-19 pandemic on the global
economy and remaining uncertainties in the energy markets, including real-time
developments of new technologies that could impact the design, scale and
structure of the project, we are working with our partners and customers to
evaluate the timing of a final investment decision. At this time, we do not
expect to make a final investment decision in 2021.
Development of the Port Arthur LNG liquefaction export project is subject to a
number of risks and uncertainties, including obtaining customer commitments;
completing the required commercial agreements, such as equity acquisitions and
governance agreements, LNG sales agreements and gas supply and transportation
agreements; completing construction contracts; securing all necessary permits
and approvals; obtaining financing and incentives; reaching a positive final
investment decision; and other factors associated with the potential investment.
An unfavorable outcome with respect to any of these factors could have a
material adverse effect on Sempra's financial condition, results of operations
and prospects, including the impairment of all or a substantial portion of the
capital costs invested in the project to date. For a discussion of these risks,
see "Part I - Item 1A. Risk Factors" in the Annual Report.
SOURCES AND USES OF CASH
The following tables include only significant changes in cash flow activities
for each of our registrants.
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CASH FLOWS FROM OPERATING ACTIVITIES
(Dollars in millions)
Six months ended June 30,                                           Sempra             SDG&E            SoCalGas
2021                                                              $  2,255          $    610          $     963
2020                                                                 1,027               738              1,198
Change                                                            $  1,228          $   (128)         $    (235)

Higher (lower) net income, adjusted for noncash items included in earnings

$    306          $    (10)         $     147
Higher dividends received from Cameron LNG JV                          304
Decrease in prepaid insurance                                          197               152                 45

Net decrease in Insurance Receivable for Aliso Canyon primarily due to $191

lower accruals offset by $6 higher insurance proceeds received

                                                               197                                  197

Release of a regulatory liability related to the 2016-2018 income tax expense

  forecasting differences in 2020                                      175                86                 89
Change in income taxes receivable/payable, net                         115              (113)              (116)
Change in due to/from unconsolidated affiliates, net                    42              (138)               (38)
Decrease in customer deposits                                          (34)              (16)               (32)
Increase in greenhouse gas allowance purchases                         (68)                                 (79)
(Increase) decrease in accounts receivable                            (109)               12                (88)
Change in accounts payable                                            (180)              (38)                 2

Change in net undercollected regulatory balancing accounts (including long-term amounts in regulatory assets)

                                         (192)              (99)               (93)

Net decrease in Reserve for Aliso Canyon Costs primarily due to $295 lower accruals offset by $19 lower payments

                           (276)                                (276)

Change in net margin posted at Sempra LNG's marketing operations

                                                            (291)
Other                                                                    1                36                  7
Cash used in discontinued operations in 2020 primarily due
to $1,159 income taxes paid related to the sale of our
South American businesses                                            1,041
                                                                  $  1,228          $   (128)         $    (235)



CASH FLOWS FROM INVESTING ACTIVITIES
(Dollars in millions)
Six months ended June 30,                                       Sempra             SDG&E            SoCalGas
2021                                                          $ (2,588)         $ (1,065)         $    (936)
2020                                                             2,854              (842)              (885)
Change                                                        $ (5,442)         $   (223)         $     (51)

Increase in capital expenditures                              $   (226)

$ (222) $ (51) Acquisition of 50% interest in ESJ in March 2021 for $79, net of $14 cash and cash equivalents acquired

                 (65)
Lower contributions to Oncor Holdings                               39
Other                                                                5      

(1)

Cash provided by discontinued operations in 2020 primarily due to $5,797 proceeds, net of transaction costs paid, offset by $502 cash sold from the sale of our South American businesses

                                   (5,195)
                                                              $ (5,442)         $   (223)         $     (51)


                                      114

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CASH FLOWS FROM FINANCING ACTIVITIES
(Dollars in millions)
Six months ended June 30,                                      Sempra             SDG&E            SoCalGas
2021                                                         $   (282)         $    206          $     (27)
2020                                                              842               286                  7
Change                                                       $ (1,124)         $    (80)         $     (34)

Lower issuances of short-term debt with maturities greater than 90 days

$ (2,170)
Lower issuances of long-term debt                              (1,604)      

$ (799) $ (649) Net proceeds from issuance of series C preferred stock in 2020

                                                          (891)
(Higher) lower common dividends paid                              (67)              200                (50)
Lower advances from unconsolidated affiliates                     (44)
Lower repurchases of common stock                                  26
Lower purchases of NCI                                             17

Lower (higher) payments on long-term debt and finance leases

                                                            148       

(2)

Lower payments for commercial paper and other
short-term debt with maturities greater than 90 days              390
Change in borrowings and repayments of short-term
debt, net                                                       3,455               517                660
Other                                                              17                 4                  5

Cash provided by discontinued operations in 2020 primarily from a $250 intercompany loan and $165 net increase in short term debt

                                      (401)
                                                             $ (1,124)

$ (80) $ (34)

Capital Expenditures, Investments and Acquisitions
EXPENDITURES FOR PP&E, INVESTMENTS AND ACQUISITIONS
(Dollars in millions)
                                               Six months ended June 30,
                                                   2021                 2020
SDG&E                                   $       1,072                 $   850
SoCalGas                                          936                     885
Sempra Texas Utilities                            100                     139
Sempra Mexico                                     231                     321
Sempra LNG                                        249                     137
Parent and other                                    1                       6
Total                                   $       2,589                 $ 2,338


The amounts and timing of capital expenditures and certain investments are
generally subject to approvals by various regulatory and other governmental and
environmental bodies, including the CPUC, the FERC and the PUCT, and various
other factors described in this MD&A and in "Part I - Item 1A. Risk Factors" in
the Annual Report. In 2021, we expect to make capital expenditures and
investments of approximately $5.9 billion, an increase from the $5.8 billion
projected in "Part II - Item 7. MD&A - Capital Resources and Liquidity" in the
Annual Report. The increase is primarily attributable to pipeline expansion
projects at Sempra Mexico, offset by a shift in timing of capital expenditures
related to ECA LNG Phase 1 at Sempra LNG.
COMMITMENTS
We discuss significant changes to contractual commitments in the first six
months of 2021, none of which were outside the ordinary course of our business,
in Notes 7 and 11 of the Notes to Condensed Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
In June 2021, Sempra provided a promissory note, which constitutes a guarantee,
for the benefit of Cameron LNG JV with a maximum exposure to loss of $165
million. The guarantee will terminate upon full repayment of Cameron LNG JV's
debt, scheduled to occur in 2039, or replenishment of the amount withdrawn by
Sempra LNG from the SDSRA. We discuss this guarantee in Note 6 of the Notes to
Condensed Consolidated Financial Statements.
                                      115

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In March 2021, Cameron LNG JV reached financial completion of the three-train
liquefaction project and Sempra's guarantees for a maximum aggregate amount of
$4.0 billion were terminated.
In July 2020, Sempra entered into a Support Agreement, which contains a
guarantee and represents a variable interest, for the benefit of CFIN with a
maximum exposure to loss of $979 million. The guarantee will terminate upon full
repayment of the guaranteed debt by 2039, including repayment following an event
in which the guaranteed debt is put to Sempra. We discuss this guarantee in
Notes 1, 6 and 9 of the Notes to Condensed Consolidated Financial Statements.
Our investments in Oncor Holdings and Cameron LNG JV and our Support Agreement
for the benefit of CFIN are variable interests. Sempra's other businesses may
also enter into arrangements that could include variable interests. We discuss
variable interests in Note 1 of the Notes to Condensed Consolidated Financial
Statements.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We view certain accounting policies as critical because their application is the
most relevant, judgmental, and/or material to our financial position and results
of operations, and/or because they require the use of material judgments and
estimates. We discuss these accounting policies in "Part II - Item 7. MD&A" in
the Annual Report.
We describe our significant accounting policies in Note 1 of the Notes to
Consolidated Financial Statements in the Annual Report. We follow the same
accounting policies for interim reporting purposes.


NEW ACCOUNTING STANDARDS
We discuss the relevant pronouncements that have recently been issued or become
effective and have had or may have an impact on our financial statements and/or
disclosures in Note 2 of the Notes to Condensed Consolidated Financial
Statements.

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